The cooling of inflation spurred consumer spending, and the US economy grew more than expected in the fourth quarter, easing concerns about a recession.

On Thursday, data released by the US Department of Commerce showed that the initial annualized quarter-on-quarter value of US GDP for the fourth quarter increased by 3.3% year-on-year. The increase slowed by 4.9% in the previous quarter, but far exceeded market expectations of 2%.

The US economy grew at an annualized rate of 2.5% throughout 2023, exceeding Wall Street expectations at the beginning of the year, and 1.9% in 2022.

The PCE index, the quarterly inflation data released at the same time, showed that inflation was stubborn. The personal consumption expenditure (PCE) price index rose 2.8% year on year, slowing down from the previous value of 3.1%, but exceeding expectations of 2.5%; the core PCE price index, which does not include food and energy, grew 2% quarterly, in line with the previous value and expected value.

Consumer spending is the main driving force

Similar to previous quarters, personal consumption expenditure increased 2.8% month-on-month, which was the main driving force for economic growth. Commercial investment and housing also boosted economic growth beyond expectations.

Although the Federal Reserve's rate hike has burdened households and businesses, employment growth and falling inflation are still driving consumer spending. Consumer spending intentions were reflected in retail sales during the holiday season, and retail sales increased rapidly in December.

As wage growth exceeds price increases, the University of Michigan said last week that the US consumer confidence index has soared 29% since November last year, the biggest two-month increase since 1991, further indicating that consumer sentiment is improving.

The fourth-quarter data was better than expected, easing market concerns about the recession. The path of inflation and how the Federal Reserve responds to inflation will be the key to judging the direction of the US economy. Economists expect that the longer restrictive interest rates are maintained, the greater the impact on demand, as well as recruitment and growth.

Markets generally expect that even though the Federal Reserve has begun discussions on easing monetary policy, it will remain on hold next week and keep interest rates at their highest level in 20 years.

Editor/Corrine